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Although every state but Texas has long allowed local inclusionary housing or zoning policies, some developers said Portland's policy is much broader than those in other cities, which have exemptions intended to accommodate different kinds of projects at various locations.

PORTLAND TRIBUNE FILE PHOTO - Some developers believe Portland's new Inclusionary Housing policy will reduce the construction of new apartments to house all the people moving here.The Portland City Council capped a year of action on the affordable housing crisis on Dec. 21 by requiring developers to include lower-priced apartments in new rental projects. Although the new program includes benefits to offset the lost revenue for developers, some say they're not strong enough and the city's "Inclusionary Housing" policy could result in less housing being built — driving up rents even more.

The program was passed at the last meeting of the former council, before new Mayor Ted Wheeler and Commissioner Chloe Eudaly replaced Mayor Charlie Hales and Commissioner Steve Novick on Jan. 1. However, the vote was unanimous in support of the proposal by Commissioner Dan Saltzman, who was in charge of the Portland Housing Bureau. Wheeler has now assigned the bureau to himself.

The new policy was made possible by the 2016 Oregon Legislature, which repealed a longstanding statewide ban on "inclusionary zoning," when local governments require developers to include a percentage of affordable units in their projects. Saltzman says it will help assure equitable housing choices across the entire city.

"Our vote .... ensures that economically diverse neighborhoods and housing affordability will be preserved for generations to come," Saltzman says.

Although every state but Texas has long allowed local inclusionary housing or zoning policies, some developers said Portland's policy is much broader than those in other cities, which have exemptions intended to accommodate different kinds of projects at various locations. The Portland policy applies to all new rental developments with more than 20 units, instead of exempting the most expensive ones, as some other cities do. And it applies to all of Portland, including the most expensive areas to build, where some cities ease their requirements.

Although the council heard those concerns, it did not significantly change Saltzman's proposal, which was supported by a broad array of affordable housing advocates.

Mixed bag?

As a result, some developers now worry the offsetting incentives might work for some projects in certain locations, but won't be strong enough for different projects in other locations. If projects don't pencil out, they say, investors will not fund them and instead will put their money into retail or commercial projects, or into apartment projects in other cities.

"We think the policy is calibrated correctly in some parts of town, but we're concerned about some of the others," says Mike Kingsella, executive director of Oregon Locus, a subsidiary of the national Smart Growth America advocacy organization that favors increased density. Locus is Latin for "place."

Kingsella says his organization supports the increased density that city leaders endorsed in numerous land use and zoning plans, including the Comprehensive Plan update approved in 2016. But while Kingsella thinks the new policy might work in those parts of the city zoned for the tallest residential buildings, such as downtown, he is unsure about its success in such mixed-use corridors as Southeast Division and Belmont streets and North Williams and Vancouver avenues, where much of the construction is currently taking place.

Signs of nervousness among developers have already surfaced. After Saltzman announced his intention to bring the policy to the council, developers rushed to file permits for new projects before it takes effect. Permit applications have been filed for about 14,000 new apartment units in recent months, far more than normal.

A more significant indication of developer concern could come after Feb. 1, when the new policy takes effect. If new permit applications fall dramatically after then, it could signal a potential slowdown in future construction caused by unintended consequences of the new policy.

The policy comes at a time of increasing tension between developers, landlords and many Portlanders. Affordable housing advocates have repeatedly blamed developers and landlords for raising rents too much. Eudaly, a small business owner, defeated Novick at the November election after accusing developers of helping to create the homeless crisis. Some council members said they did not want the new policy to unjustifiably enrich developers, who reject the accusations.

Other steps taken

There is no doubt that Portland is facing an affordable housing crisis. Rents and home prices have both been increasing faster than practically anywhere in the country, in large part because of the number of people moving here to take advantage of the booming regional economy. The Comprehensive Plan update predicts that 123,000 new housing units will be built to house additional residents by 2035.

The council has taken several actions to increase the supply of affordable housing since declaring a Housing State of Emergency in October 2015. It increased the amount of urban renewal dedicated to such projects to 45 percent (up from 30 percent), partnered with Multnomah County for an additional $30 million in affordable housing spending, and put a $258 million affordable housing bond on the November ballot that was approved by Portland voters. Wheeler has suspended spending more of that money until priorities and goals are more clearly set.

But the new Inclusionary Housing policy is fundamentally different because it injects new requirements into the private sector apartment construction market, which is constantly changing because of such factors as land costs, interest rates and the earning potential of other investments.

How it works

The new policy gives developers a number of ways to comply. They can set aside 20 percent of the units to households that earn 80 percent or less of the area's median income. Or they can set aside 10 percent of the units to households that earn 60 percent or less of the median. In either case, the households would not pay more than 30 percent of their income for rent.

The policy includes a number of benefits to offset the lost revenue from the lower-priced units. They include 10-year waivers of property taxes on each affordable unit, waivers of the city's Construction Excise Tax and System Development Charges, density bonuses, and an exemption from minimum parking standards for projects that are close to transit.

In addition, an "off-site option" allows developers to comply with the requirement by either building new units or dedicating existing units at a site near the new development.

Vanessa Sturgeon, CEO of TMT Development, says the benefits are not strong enough to assure financing for many of the kinds of projects that are being built.

"Only the 10 percent requirement is realistic, which is not going to result in enough new affordable housing units to make a significant difference," Sturgeon says.

Saltzman told the council he is confident the new policy is correctly calibrated to allow future construction to continue and create many more desperately needed affordable housing units. And, Saltzman added, it can always be adjusted to meet market demands.

Kingsella says it makes more sense to get the policy right the first time.

"We will be watching what happens and report what we see to the city," he says.

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